Financial Recovery of Iceland a Case Worth Studying

Out of the AbyssLooking for Lessons in Iceland's Recovery

In 2008, Iceland experienced one of the most dramatic crashes any country had ever seen. Since then, its recovery has been just as impressive. Are there lessons to be learned? SPIEGEL went to the island nation to find out.

What should one expect from a country in which the sentence, "What an asshole!" is a compliment? Icelanders say "asshole," or "rassgat," when they tousle a child's hair or greet friends, and they mean it to be friendly.

While trudging through a lava field within view of the Eyjafjallajökull volcano, the guide says: "Iceland is the asshole of the world." That, too, is a positive statement. It's also a geological metaphor. In Iceland, which lies on the Mid-Atlantic Ridge and thus on the dividing line of the North American and Eurasian tectonic plates, the earth has a tendency to relieve itself through various geysers, volcanoes and hot springs.

The island, an unlikely geological accident, has existed for some 18 million years, but has only been inhabited for 1,100 years. A pile of lava pushed out of the Atlantic that could eventually disappear again, it's affectionately called "The Rock" by residents. Icelanders were traditionally fishermen and farmers until they decided to turn their country into a casino for global capital around the turn of the millennium.

But now they have returned to fishing, and gladly talk about their journey back to financial health. SPIEGEL spoke with an investor, a finance minister and a fisherman, in addition to an economist who says apologetically: "Icelanders are just daredevils." And then there was a sex and knitting expert who says she believes Iceland has "found its way back to itself."

What happened in Iceland from 2008 to 2011 is regarded as one of the worst financial crises in history. It seems likely that never before had a country managed to amass such great sums of money per capita, only to lose it again in a short period of time. But Iceland, with a population of just 320,000, has also staged what appears to be the fastest recovery on record. Since 2011, the gross domestic product has been on the rise once again, most recently at 2 percent. What's more, salaries are rising, the national debt is sinking and the government has paid off part of the billions in loans it received in 2008 from the International Monetary Fund ahead of schedule. It's a sign of confidence.

But how did they do it when others cannot? Can we learn something from Iceland?

The Economist

"At the beginning of the Icelandic Miracle was Germany, "says Ásgeir Jónsson, 43, in his office as he bends over a few diagrams. They all snap downward in the fall of 2008 before showing a gradual climb starting in 2010. But why Germany? Jónsson clearly enjoys the surprise on his guest's face.

Jónsson was head economist for Kaupthing Bank, one of the three Icelandic banks that leveraged far too much debt and crashed overnight in 2008 following years of unprecedented growth. Billions evaporated instantly while hundreds of thousands of depositors and foreign investors feared they would lose their money. Jónsson's job disappeared as well; with his newfound free time, he wrote the book "Why Iceland?: How One of the World's Smallest Counties Became the Meltdown's Biggest Casualty."

It was German money, Jónsson says, that flowed the most freely following the liberalization of Icelandic banks in the 1990s. Still today, Germany is the country's largest creditor, he says. In 2010, German banks had over 20 billion in open claims in Iceland. "Germany has a weakness for Iceland," says Jónsson, who now works as an economics professor in Reykjavik. "Even Wagner borrowed from our legends for his operas," he says. In 2012, the number of German tourists to Iceland, with 65,000 visitors, was in third place behind the US and Great Britain.

Iceland's rapid return to health hinged on a series of measures that Nobel laureate Paul Krugman later referred to as "doing an Iceland." Krugman, an admirer of Iceland's dramatic comeback, has recommended a similar policy cocktail for other nations in crisis. The rules are as follows: Allow your ailing banks to collapse; devalue your currency if you have one of your own; introduce capital controls; and try to avoid paying back foreign debts.

That may sound like an extremely self-serving recipe -- and it was. Whereas billions of public money was pumped into the banking system in Ireland so that financial institutions could pay back their creditors, Icelanders voted against this route in two separate referenda. They couldn't see why they should pay for the greed of foreign investors who followed the Siren song of high interest rates to the island nation.

Jónsson only shakes his head wearily when asked if he has a guilty conscience. He claims to have been one of the few who warned of the currency bubble long before it burst. Now, he is excited about the country's new opportunities, which are remarkably similar to the ones it has always had. "A hard-working populace. A healthy democracy. A high level of education. Tourism. Natural resources, such as wind, hydro-power and geothermal energy. And fisheries. What would we be without the fisheries?"

The Fisherman

A powerful-looking reindeer head with a full rack is mounted on Valli Hoskuldsson's wall. On a bookshelf below, there are books on risk management and global finance. Hoskuldsson, a large man with a gentle voice, just returned from a 40 day fishing expedition in the Arctic Ocean on a 60-meter trawler, the Reval Viking, during which a couple hundred tons of shrimp and halibut were caught.

He began his career as a fisherman, before Icelandic men suddenly entered the financial sector to become investment advisers. Hoskuldsson himself was hired at a local bank called Glitnir, which went on to suffer billions in losses. "I was one of the guys who foisted loans on people," says Hoskuldsson. He remembers well the day that a farmer wanted to take out a mortgage worth 10 million kroner (about 65,000) on a 20-year-old piece of farm equipment. "I went to my boss with my doubts. He just said: 'Give him the money, and if he wants twice as much, give that to him too.'"

Just a month after leaving his job at the bank, Hoskuldsson was hired as a mechanical engineer on a fishing boat. Today, he views the banking job as a mistake motivated by the promise of high bonuses. It's the way many Icelanders speak of that time: They feel deceived by the country's elite and their big money, the mechanisms of which they hardly understood.

Today, fisheries are responsible for some 42 percent of Iceland's exports. Shortly after the crisis, the state opened all of its fishing sites, allowing every citizen to catch and sell up to 650 kilograms (1,433 pounds) per day when fishing is allowed, which has prompted many amateur fishermen to spend evenings and weekends on the water. What could be more Icelandic than a fishing citizenry?

The Investor

With his untucked shirt, leather wristband and smile, Skúli Mogensen is considered to be one of Iceland's wealthiest residents, and some say he's also one of the coolest. Once a student of philosophy, he now founds companies and collects art. A series by prominent Danish-Icelandic artist Ólafur Elíasson called "Cars in Rivers" hangs on his office wall in Reykjavik. It features SUVs stuck in Icelandic rivers, while Icelanders try to pull them out -- a symbol of the country's hubris, but also its determination.

In October 2008, the same week that Iceland's then-Prime Minister Geir Haarde called on the Almighty to protect the country in a television address, Mogensen sold his software company OZ Communications -- based in Montreal, where Mogensen had been living for years -- to Nokia. When he heard the news of the financial collapse back home, he says: "I knew I had to go home, that they could use me now. Me and my money."

The 45-year-old invested in start-ups and founded discount airline Wow Air, which today brings tourists from 16 European cities to Reykjavik. Lying nearly horizontal in a leather chair, he continues: "I knew there are three major growth sectors in Iceland. First, fisheries, but that market is highly regulated. Second, tourism. The industry is currently growing by more than 20 percent per year. It's crazy. Thus, the airline. Third, alternative energy. Iceland is the quintessential eco-country. That's the reason for the bio-methanol thing."

When it comes to energy technology, Icelanders are pretty spoiled. Instead of heating their water to shower, they have to cool it down to avoid burning themselves. Hot water is piped under the country's sidewalks to keep them ice-free. And near the airport in Reykjavik there is a geothermal power plant that not only helped the country create its biggest tourist attraction, the Blue Lagoon geothermal spa, but also aided Mogensen in his most recent investment. The lagoon is full of fantastically blue, siliceous saltwater, the byproduct of the power plant next door. Carbon Recycling International, one-fourth of which is owned by Mogensen, uses another of the plant's byproducts: carbon dioxide.

It sounds like a magic trick, and perhaps the elves and trolls that many Icelanders believe in are involved. A special process transforms the environmental killer CO2 into methanol, a green fuel. "In 2014 we want to produce 3 million liters per year," or about 3 percent of that on the world market, he says.

Methanol can be mixed with conventional gasoline, and theoretically, production stations like Carbon Recycling International's could be set up everywhere that CO2 is a byproduct. Renewable energy is thought to be Iceland's big chance for future exports. So far, the country uses just 25 percent of its potential hydropower and geothermic energy. Thus, state-run energy firm Landsvirkjun wants to build the world's longest submarine power cable to begin supplying the United Kingdom with green energy by 2020. By that time, Mogensen says, he believes that every car on Iceland's roads will be powered by renewables, just like his off-road vehicle. "It runs completely on bio-methanol," he says as he climbs in.

The Knitting and Sex Expert

The Icelandic financial crisis and recovery could be seen as the most expensive group therapy of all time. The Icelanders had five years to come together and ask themselves: Who are we, and what is our place in the world?

"I am happy that the crisis happened," says Ragnheidur Eiríksdóttir, who calls herself Ragga. "We Icelanders know once again what's important to us."

If one is to believe Ragga and several opinion polls, knitting is among these things. Since 2008, she says, "suddenly everyone started to knit Icelandic sweaters like crazy." Indeed, young Icelanders do seem to walk around less frequently in cheap labels like Zara and H&M than they do in patterned hand-knit sweaters. "They are warm, they are beautiful, they are very Icelandic. There is something comforting about them," Ragga says. She also sees them as the antithesis of suits, the globalized uniform of bankers.

Thus Eiríksdóttir began charging money to teach young Icelanders to knit. She has since produced a knitting DVD and now travels through Europe and the United States, and offers knitting tours through her own country with her company Knitting Iceland.

After the crash, many Icelanders turned away from the world and global trade. They began spending more time with their families and children, in the outdoors and with Icelandic books. Alcohol consumption dropped among young Icelanders, and the subjective feeling of happiness increased.

And along with the demand for knitting yarn came an increased desire for traditional Icelandic dishes such as lamb offal, pickled sheep testicles and horrible-smelling fermented shark meat. You are what you eat, and the Icelanders wanted to be Icelanders again.

Ragga orders another beer. She looks a bit like an ancient goddess of love in a wool sweater. She is also an expert on Icelandic relationships. She moderates a television dating show and is currently writing a book called "The Sexual Secrets of Icelanders." Women and men in the country, she says, have little trouble finding each other and hooking up. What else should one do in winter, where night lasts all day?

With an average of 2.2 children per woman, the country also has the highest birthrate in Europe. The country's demographic structure is one that is unknown in other European countries. Economist Jónsson calls it "Third World demography" -- with half of the country's population being under the age of 35. The high rate of reproduction may also have something to do with the fact that Iceland views childcare as a state responsibility, with 90 percent of one- to five-year-olds going to daycare. Young parents also don't have to worry about their careers when they have children. Some 78 percent of the country's women are employed, the highest rate in the world. But there is also another motivation. "We are a rather small people," says Ragga. "We need to avoid shrinkage."

During a walk through the parks of Reykjavik, it seems to the visitor from continental Europe that he is visiting both the past and the future. One sees more couples pushing strollers than Germany has seen since the 1950s. At the same time, though, it is a generation that is extremely well networked and excellently educated. Fully 95 percent are connected to the Internet with one third in possession of a university degree.

The Minister

Get to the point, please, Bjarni Benediktsson doesn't have much time. Since May, he has been Iceland's new economy minister in addition to leading the Icelandic Independence Party. It is the same party that steered the country into the abyss, leading to a catastrophic defeat at the polls in 2009. But now, the party is back and has promised relief to the country's indebted households. Following elections in the spring of 2013, the global press noted with surprise that Iceland had made the former arsonists into its new fire department.

Benediktsson is 43, but looks more like 30 with his youthful features and nice suit. Does he have a bad conscience about what happened? "I can't really say that I am sorry, no. You can't take the blame for others' mistakes. I would love to be able to pay back all foreign creditors. But that simply isn't possible. Sorry. Any other questions?"

Why did Iceland succeed where countries like Greece and Spain failed? The minister avoids the question, saying that he finds comparisons with southern European nations in crisis to be unhelpful. In contrast to such countries, he notes, Iceland always had excellent state institutions and very little sovereign debt. "It was exclusively a problem relating to the irresponsible private sector," he says. Then he must go. Meetings.

What, then, can one learn from Iceland? Pride comes before the fall? Stick with what you know? The equally euphoric and oppressive feeling one gets is that this island nation is completely unique. One can take very little home aside from a few photographs. No applicable lessons. What goes wrong here can be fixed more quickly than elsewhere. What works here is difficult to copy in places where the situation is larger and more complex.

At the same time, Iceland is isolating itself further. One of the first things the new government did was to put EU accession negotiations on ice. Iceland on its own is enough, seems to be the message.

The Icelanders' new, solitary happiness, however, is also dangerous. Economist Ásgeir Jónsson fears "economic and mental isolation" for his country in the future. Foreign investors, as badly as they are needed, are scarce and export levels are insufficient. His fellow citizens, Jónsson observes, hardly seek to inform themselves anymore about the goings on in the rest of the world. "But we have to open ourselves to the world; otherwise we will definitely go under in the next crisis."

In the Harpa Concert Hall in Reykjavik, comedian Bjarni Thorsson teaches tourists how to "become Icelandic in 60 minutes." At the end of the bit, he confides in his audience that the most important sentence in Icelandic is "Petta reddast:" Everything will work out. Icelanders can handle anything. He has his audience chant the mantra while in the offbeat he intones some of the typical catastrophes that can befall his countrymen as everyone claps along.

Due to the availability of Geo thermal power , Iceland has great potential for manufacturing Hydrogen gas and Hydrogen fuel cells.
The fishing industry will most likely also improve over the short term as changing ocean [...]

Due to the availability of Geo thermal power , Iceland has great potential for manufacturing Hydrogen gas and Hydrogen fuel cells.
The fishing industry will most likely also improve over the short term as changing ocean temperatures will see more Atlantic Cod moving into their waters .

unheilig-Fremde 01/10/2014

2. optional

Icelanders are a small and racially homogeneous group, so they find it much easier than most other nations to reach a consensus. The key mistake the rest of us made was to bail out the reckless banks with public money. The results [...]

Icelanders are a small and racially homogeneous group, so they find it much easier than most other nations to reach a consensus. The key mistake the rest of us made was to bail out the reckless banks with public money. The results is that nothing has been learned and the same casino capitalism makes all the rules, benefiting the richest members of society while impoverishing everybody else. Iceland made the best of a bad job; we chose to apply bandages to mortal wounds and carry on as before, so it's only a matter of time before the next fiscal crisis engulfs us-and next time even the mighty German economy might not ride it out.

Harry Caul 01/11/2014

3. Euro Myth

This story is exactly what the EU and Brussels do not want people to hear. Any story of a successful country who does not use the Euro is dangerous.

This story is exactly what the EU and Brussels do not want people to hear. Any story of a successful country who does not use the Euro is dangerous.

johnhall500 01/11/2014

4. Iceland

The moral of this article is.Keep control of your own currency boost the native population,and don't rely on low pay/no skill jobless,penniless and homeless migrants.Sounds like common sense to me, bring it on.

The moral of this article is.Keep control of your own currency boost the native population,and don't rely on low pay/no skill jobless,penniless and homeless migrants.Sounds like common sense to me, bring it on.

gd81 01/11/2014

5. National Character

I can't overlook the distinct sympathy expressed for the Icelanders: They went from fishers to bankers overnight, ammassed a huge private debt and then the banks & country went bancrupt, while the people refused to pay back [...]

I can't overlook the distinct sympathy expressed for the Icelanders: They went from fishers to bankers overnight, ammassed a huge private debt and then the banks & country went bancrupt, while the people refused to pay back their foreign debt to German and British banks. But still they are being portrayed as a wonderful and happy nation, as "ancient goddesses of love" and "youthful politicians in nice suits", and not as a nation of sleazy, bancrupt cheaters. EWhen I compare it to the spiteful, aggressive and demeaning way that the Greeks as a nation have been treated by the Spiegel and other German magazines, it can only fill me with pain and anger.